You’ve discovered the perfect ranch in Montana that you simply cannot live without, or perhaps a luxurious waterfront vacation home that promises to create cherished memories for years to come. What is the next step? Your real estate agent will prepare the purchase and sale agreement and other related documents. One crucial element to define in the contract is the amount of earnest money.

But what is escrow? Escrow refers to a financial arrangement in which a neutral third party, typically a title agent, manages the payments between the buyer and seller. Upon closing, the title company places the buyer’s funds into escrow, which are allocated toward closing costs, property taxes, and insurance premiums.

The earnest money specified in a purchase agreement serves as a good-faith deposit. This payment, made by the buyer, demonstrates their serious intent to purchase the property. Once the buyer submits the earnest money deposit, neither party can access these funds until the transaction is finalized. It is important to note that earnest money is distinct from the down payment; while it contributes to the overall purchase price, it is not the same. The earnest money is returned to the buyer if the transaction falls through. Additionally, if the contingencies outlined in the contract cannot be resolved, the earnest money will be refunded. However, if the buyer abandons the transaction, they risk losing their earnest money deposit.

While there are no legal requirements mandating a deposit with an offer, it is a common practice. In competitive markets, the amount of earnest money can give buyers a strategic advantage. Earnest money deposits can vary widely, ranging from a percentage of the purchase price to a standard amount of $500. The appropriate deposit amount may depend on various factors, including the nature of the market, the presence of a down payment, any contingencies within the offer, and the property’s size.